All euro zone nations are culpable, says ECB

German and French taxpayers should blame their own governments for some aspects of the debt crisis that is threatening to tip the continent into recession, according to a central bank executive board member seeking bigger political commitments to stave off a debt default.

The European Central Bank’s
Lorenzo Bini Smaghi
said governments across the euro zone should have taken more action to ensure nations like Greece stuck to the rules of monetary union.

The comments came in an interview in which Mr Bini Smaghi emphasised the need for fast and tough fiscal action by Greece and other nations weighed down by debt, saying that dragging out the difficult decisions might only lead to another crisis.

Opinion polls show that voters in France and Germany object to plans by their governments to back a rescue fund that could help Greece as well as Portugal, Ireland, Italy and Spain fund their budgets.

But Mr Bini Smaghi said that the complaints from German taxpayers about having to bail out the Greeks were a reflection on past German governments.

“Cynically, I would say they didn’t make sure that their politicians played their role in ensuring that Greece stood by the rules," he said.

“I think to some extent German taxpayers should blame their politicians because they didn’t monitor and they didn’t implement the common rules in an appropriate way."

The rules, if followed, would have prevented Greece incurring the debts that have now crippled its government and provoked street protests against budget cutbacks.

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However, the blame was not equally shared, he said: “It’s mostly the responsibility of the Greeks."

The ECB executive board member warned that while budget cuts in euro-member nations might trim economic growth, this was better than dragging out the restructuring over many years.

“If you do a fiscal adjustment it has an impact on income. In the first year it may have an impact and in the second year too, but that doesn’t mean it kills growth because growth resumes," he said in an interview last week.

“In Latvia, for instance, or the Baltics, they made huge adjustments, front-loaded, saw a huge contraction in GDP [gross domestic product], and then they’re starting to grow again.

“I think the lesson when you compare that to Greece is that it’s better to front-load than to have a piecemeal approach, year by year. Then you get the reduction in income translating to a reduction in growth if it is year by year.

“But if it is front-loaded you may have a shock at the beginning, but after that the growth forces start moving again."

Asked if there was a lost decade ahead, he said Europe was ahead in terms of the fiscal adjustment but he also warned against any decision by political leaders to forestall tough decisions.

“I think there is a need to work on the deleveraging of the financial system, also, but the sooner you do this, the sooner you put the countries back to a path of sustainable growth.

“If you slow down the deleveraging – if you go on with very low interest rate policy and so forth – there the risk is that the adjustment never takes place or is postponed, and either you have low growth or you have a new crisis."